Hour Loop, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Hour Loop sells consumer products online, primarily as a third-party seller on Amazon. It reported that approximately 100% of revenue came through or with Amazon.
Financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net revenue | $12.35 million | $9.32 million | +32.5% |
| Gross profit / margin | $6.46 million / 52.3% | $5.23 million / 56.1% | Margin down 3.8 percentage points |
| Operating expenses | $7.20 million | $4.36 million | +65.0% |
| Operating income (loss) | $(745,352) | $864,358 | Turned to loss |
| Net income (loss) | $(644,888) | $865,894 | Turned to loss |
| Basic and diluted EPS | $(0.02) | $0.03 | Turned negative |
| Cash from operating activities | $(7.92) million | $(1.16) million | Greater cash use |
Orders increased 36.2%, to approximately 527,560. Gross profit rose 23.5%, slower than revenue growth. Selling and marketing expense increased to $5.53 million from $3.83 million; general and administrative expense rose to $1.68 million from $537,000. Management attributed higher costs to Amazon platform fees, employee growth, and legal and professional fees. Shipping and handling expense was $2.65 million, versus $1.81 million.
Liquidity, balance sheet, and financing
- Cash and cash equivalents were $7.66 million at March 31, down from $10.59 million at December 31, 2021. The company used $7.92 million in operating cash, principally amid inventory investment and operating losses.
- Inventory increased to $11.77 million from $7.04 million, including $1.81 million in transit. Working-capital needs are a stated liquidity pressure.
- Current assets were $20.38 million and current liabilities $13.38 million. Total liabilities were $13.59 million; stockholders’ equity was $7.62 million.
- No balance was outstanding on the $785,000 Bank of America line of credit. The filing reports $27,996 of deferred interest related to that facility. The $27,012 PPP loan and accrued interest were forgiven in May 2021.
- Amounts due to related parties were $4.27 million, down from $5.21 million. This includes a subordinated shareholder loan of $4.17 million bearing 2% interest and due December 31, 2022; accrued interest was $103,746. The company repaid a separate $1.04 million shareholder loan in January 2022.
- The January 2022 IPO raised $6.9 million gross and $6.16 million net after reported offering expenses. The company ended the quarter with 35,032,753 shares outstanding.
- Operating lease liabilities were $465,086, including $257,684 current. The new Taiwan office lease runs through December 2023.
Material changes, outlook, and risks
Revenue growth was attributed to business growth, a maturing operating model, and a favorable e-commerce environment. However, the company swung from profit to loss as expenses increased faster than gross profit. Sales returns were 7.26% of gross revenue, compared with 6.76% a year earlier. Management also reported COVID-related supply-chain disruption, product availability constraints, Amazon fulfillment limits, and higher product costs.
No specific financial guidance was provided. Management plans to expand by adding business managers, vendors, and SKUs, while noting that growth may increase working-capital needs, platform fees, public-company costs, marketing expenses, and infrastructure requirements. The company said it expected COVID-19’s impact not to be significant and that it saw no substantial doubt about its ability to continue as a going concern.
Sales-tax exposure is notable: the company accrued $693,531, including estimated penalties and interest, and said it was negotiating and remediating amounts owed to states, with a goal of becoming compliant by December 31, 2022. The filing reported no material pending legal proceedings or significant commitments. It also disclosed that disclosure controls and procedures were ineffective as of March 31, 2022; a consulting firm’s internal-controls review was ongoing.
Financial-statement presentation note: The statement of operations labels $182,533 as an income-tax “provision,” although the pretax loss and net loss imply a tax benefit; the tax note describes the amount as a benefit. The filing text does not provide a clear, consistent label for this item.
Important facts for investors to verify
- Whether revenue and margins can hold up as operating costs and Amazon fees rise, given the company’s near-total dependence on Amazon.
- Inventory sell-through, cash conversion, and the funding needed to support continued growth after the quarter’s substantial operating cash use.
- Repayment terms and source of funds for the $4.17 million related-party loan due in December 2022.
- Resolution and final amount of the accrued sales-tax liabilities, including potential penalties and interest.
- Progress on remediation of ineffective disclosure controls and any resulting changes to internal controls.
- Clarification of the income-tax benefit/provision presentation and reconciliation of cash-flow disclosures across the filing.